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Inflation is leading to Stealth Cuts for students

Students stealth cuts

Automatic stealth cuts

Yesterday the Government announced that maintenance loans for university students will rise in line with projected inflation. The rate of 2.8% will be applied and if forecasts pan out will make up for the losses in student’s earning power due to inflation.

This rise is in line with long standing policy. However as the Institute for Fiscal Studies (IFS) points out, a lack of change to this policy will lead to a large real-terms cut in support for students over the coming year.

The reason for this is that during the two most recent annual adjustments, inflation was predicted to be significantly lower than it turned out to be in practice. Inflation predications and even measurement are never perfect and in practice we should expect them be wrong sometimes.

The usual remedy for over and undershooting inflation predictions would be to adjust future increases to compensate students or the public purse for the impact of inflation. The Government has decided not to do that in this case which will in effect cut funding for maintenance loans.

Impact of stealth cuts

The IFS reports that the result of ‘baking in’ the below inflation rises of the last two years will mean students from the poorest families will be £1500 worse off per year than they would have been if rises were in line with inflation.

“The most important part of today’s announcement is that the government has allowed the large cuts to student support since 2020/21 to become baked in. This means that merely due to inflation being higher than forecast, students from the poorest families will be entitled to £1,500 a year less in maintenance loans than if inflation forecasts had been correct.”

Ben Waltmann, Senior Research Economist at the Institute for Fiscal Studies

The whole package

The Government announcement yesterday however branded the in-line-with-inflation rise as a “Cost of living boost for students” citing a continued freeze in tuition fees and an additional £15 million in hardship funding given to the Office for Students.

“We recognise students continue to face financial challenges, which is why we are increasing loans and grants for living and other costs for a further year.  For the sixth year in a row, we have frozen tuition fees for a full-time undergraduate course at a maximum of £9,250 which will reduce the initial amount of debt students will take on.”

Minister for Skills, Apprenticeships and Higher Education Robert Halfon

Final thought

The Government is in an extremely difficult position. The threat of continued high inflation will not be going away in 2023. The war in Ukraine and the reopening of large parts of the Chinese economy could constrict energy supply and demand respectively. In these circumstances an inflationary spiral is possible where the Government awards increased in spending and pay which set expectations for future rises.

At the same time Liz Truss’ brief but memorable stay in Number 10 has sketched out the limits that markets will set to increases in public borrowing. Rishi Sunak is already under attack from Labour for being a high tax Prime Minister. That leaves public spending cuts, which after austerity and given the low trust of the electorate in the Conservatives, particularly led by a multimillionaire Prime Minister to make cuts in line with their values will be politically difficult to say the least.

Inflation here offers the Government a small opportunity. By raising spending slower than inflation the Government can make real-terms cuts in public sector spending (and pay) while announcing nominal increases in spending. Hence “Cost of living boost for students”. We should expect similar announcements in the months to come and despite the Government’s fervent hopes they will be reported as ‘cuts’.

Fixes to the current economic situation are either out of the Prime Minister’s control (lower oil, gas and food prices by ending the war in Ukraine) or politically difficult with short term pain and uncertain long term benefits. Growth could come from closer integration with the EU’s single market, reform of the housing market, schemes to cut the number of working aged adults that are not in the workforce and a more growth orientated version of levelling up. A fractious party, invigorated opposition and impending General Election make for a huge mountain for Rishi Sunak’s Government to climb.

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